INTRODUCTION

1. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention) requires each Contracting State to recognise an agreement to arbitrate.[1]
2. The New York Convention also requires the court of a Contracting State, when seized of a matter in respect of which the parties have made such an agreement, to, at the request of one of the parties, refer the parties to arbitration, unless it finds the agreement is null and void, inoperative or incapable of being performed.[2]
3. Contracting States have implemented these obligations in various ways. Australia has done so by the International Arbitration Act 1974 (Cth), s 7(2), which requires a court to stay proceedings brought in the face of an arbitration agreement by a party to the agreement.
4. By s 7(4), a ‘party’ to an agreement includes a party claiming ‘through or under a party’.
5. The recent decision in Flint UK v Huhtamaki Pty Ltd[3] held that s 7(4) can have the effect that a non-party to an arbitration agreement can be compelled by an Australian court to submit to arbitration a claim against a party to the agreement.

THE FACTUAL BACKGROUND

6. Flint concerned a claim by an Australian company, Lion Dairy & Drinks Pty Ltd (Lion) against another Australian company, Huhtamaki Australia Pty Ltd (HA) for damages for loss suffered by allegedly defective packaging supplied by HA.
7. The packaging had been manufactured in New Zealand and supplied to HA by a company that was related to HA, Huhtamaki Australia Pty Ltd (HNZ).
8. HA denied that the packaging was defective, but also claimed that any defect was a result of ink sold to HNZ by Flint Ink NZ Pty Ltd (Flint) and used by HNZ in the packaging it supplied to HA. HA sought to join Flint to the proceedings by way of third party claim.
9. HA alleged that Flint owed HNZ, and HNZ’s customers, a duty of care which was breached by Flint providing negligent advice to HNZ that the ink to be supplied by Flint was suitable for the packaging HNZ supplied to HA.
10. The agreement between HNZ and Flint contained a provision whereby any dispute, controversy or claim arising out of or related to the Agreement … shall be finally settled by arbitration’.
11. There was no agreement between Flint and HA and Flint did not deal with HA.
12. Flint sought a stay of the proposed third party proceedings against it, on the basis that HA was, in relation to the claim it sought to make against Flint, claiming by or through a party to the arbitration agreement (i.e HNZ) and that the claim was capable of settlement by arbitration pursuant to the agreement.
13. The claim for a stay was refused at first instance. Flint appealed to the Victorian Court of Appeal.

THE STATUTORY BACKGROUND

14. By s 7(2) of the International Arbitration Act 1974 (Cth), where proceedings are instituted by a party to an arbitration agreement in relation to a matter that is capable of settlement by arbitration, an Australian court shall stay so much of the proceedings as involves the determination of that matter, on such conditions as it thinks fit, and refer the parties to arbitration.
15. By s 7(4), for the purposes of s 7(2), a party ‘includes a person claiming through or under a party’.
16. In the Victorian Court of Appeal, it was said that s 7(4) ‘enlarges the definition of ‘a party to an arbitration agreement’ [in s 7(2)] by deeming persons claiming ‘through or under’ a party to themselves be parties to that agreement’ (at [11] per Warren CJ).

THE MEANING OF ‘THROUGH OR UNDER’ A PARTY TO AN ARBITRATION AGREEMENT

17. In that context, the meaning of ‘through or under’ is highly material to the scope of the Australian courts’ power to stay proceedings and refer the parties to arbitration.
18. The words ‘through or under’ in s 7(4) had been previously considered by the High Court, Australia’s ultimate appellate court, in Tanning Research Laboratories v O’Brien (1990) 169 CLR 332.
19. Tanning concerned an appeal against a liquidator’s rejection of a proof of debt that allegedly arose from a contract containing an arbitration clause, giving rise to the question of whether the liquidator was claiming ‘by or through’ the company in liquidation.
20. The High Court held that the liquidator, in resisting the claim, was claiming ‘by or through’ the company.
21. Although the liquidator was not himself making a claim, it was held that ‘a person who claims through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right’ (at 342 per Brennan and Dawson JJ (Toohey J agreeing).
22. Brennan and Dawson JJ, with whom Toohey J agreed, reasoned that the words ‘through or under convey the notion of a derivative cause of action or defence … that is derived from the party [to the arbitration agreement]’ (at 342). Their Honours also commented that ‘an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party [to the arbitration agreement] before the person claiming through or under that party can rely on the cause of action or defence’ (at 342, emphasis added).
23. The High Court held that an essential element of the liquidator’s defence to the creditor’s claim was vested in the company in liquidation, which was a party to a relevant arbitration agreement, as the liquidator stood ‘in the same position vis-a-vis the creditor as … the company’ (at 342 per Brennan and Dawson JJ (Toohey J agreeing)). Accordingly, the creditor’s appeal against the rejection of its proof was stayed and referred to arbitration.
24. In Flint, the Victorian Court of Appeal accepted that the ‘essential element’ test ought to determine whether HA was claiming against Flint ‘through or under’ HNZ.

HA WAS CLAIMING ‘BY OR THROUGH’ HNZ?

25. HA contended that ‘through or under’ in s 7(4) ‘requires ‘standing in the same position’ as the party to the [arbitration] agreement and is thus restricted to privies whose rights were derived from the party [to the arbitration agreement] via an assignment or other process of law’ (Flint at [18] per Warren CJ; see also at [69] per Nettle JA).
26. The Victorian Court of Appeal held that the ‘essential element test was not so limited (at [19]-[20] per Warren CJ, [60] per Nettle JA).
27. Further, the court found that the ‘essential elements of [HA’s] claim against [Flint] are that [Flint] breached its agreement with [HNZ] or breached a duty of care to [HNZ] which is alleged to have arisen out of the agreement’ (at [74] per Nettle JA). HA’s claim was ‘critically dependant upon and derivative from the contractual and common law obligations alleged to have been owed by [Flint] to [HNZ]’ (at [76] per Nettle JA; see also at [26] per Warren CJ, at [148] per Mandie JA).
28. In those circumstances, the court held that HA’s ‘rights against [Flint] are so closely related to [HNZ’s] rights against [Flint] that [HA] is claiming through or under [HNZ]’ (at [74] per Nettle J).
29. Nevertheless, it was noted that a different result would follow where ‘a claimant relies on a duty of care owed directly to [it] which is not dependant upon or derived from any claim’ of another (at [76] per Nettle JA).

THE STAY ORDER

30. A peculiar feature of this case was that, as HA was not a party to the arbitration agreement, there was some doubt as to whether it could initiate an arbitration to pursue its claim against Flint.
31. The stay power in s 7(2) of the International Arbitration Act, however, permits a court to order a stay ‘on such conditions as it thinks fit’.
32. To address any concerns as to HA’s ability to commence an arbitration, the Victorian Court of Appeal granted the stay on the condition that Flint ‘use its best endeavours to refer the [HA] claims to arbitration in accordance with the arbitration clause and pursue the arbitration with due expedition’ (at [117] per Nettle JA; see also at [41] per Warren CJ).

CONCLUSION

33. The decision in Flint indicates the breadth of the judicial power in Australia to stay proceedings commenced in the face of an arbitration agreement, which includes referring to arbitration claims by a person who claims by or through a party to an agreement to arbitrate.
34. In particular, the stay power extends to compelling persons who are not parties to an arbitration agreement to arbitrate claims that bear a close relation to the contract containing that agreement.
35. In Australia, a person who is not a party to an arbitration agreement will be required to arbitrate claims the essential elements of which arise, or are derived, from the contract containing an arbitration agreement, such as the negligence claim in issue in Flint, which was dependant upon a finding that a duty of care was owed to a party to the agreement.
36. No doubt there is room for much argument in particular cases as whether the essential elements of a claim are derived from those of a party to an arbitration agreement. Flint indicates, though, that the test may be more readily satisfied where a non-party’s claim arises out of the rights of a related company that is a party to an agreement to arbitrate.

[1] Article II, r 1

[2] Article II, r 3

[3] Flint UK v Huhtamaki Pty Ltd [2014] VSCA 166; 289 FLR 30

I. The Myth

More than likely many readers have attended conferences where self-styled experts on Southeast Asia, including Indonesia, (few of whom have any experience in the region at all) have blithely insisted that foreign awards cannot be enforced in Indonesia.   That, dear readers, is a Myth.   True, it was not a myth until 25 years ago, but one does not go to conferences, nor read professional notes, to be regaled with 25-year-old “news”.

II. The History

Indonesia ratified the New York Convention (1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards) in 1981. Until that time, enforcement of arbitral awards was handled in the same manner as enforcement of final and binding court judgments. Arbitration, as well as civil litigation, were at that time regulated under the mid-19th Century Dutch Code of Civil Procedure, Reglement op de Rechtsvordering (generally known as the “RV”) , which, together with other Dutch procedural laws, had been adopted by Indonesia upon her independence in 1945. The RV still governs litigation but since 1999 arbitration is governed by its own Arbitration Law, Law No. 30 of 1999.

Article 463 of the RV provides that, with virtually no exception, judgments of foreign courts cannot be enforced in Indonesia. Thus it was always assumed that the same applied to foreign-rendered arbitration awards and thus these could not be enforced in Indonesia.   Although the ratification of the New York Convention clearly changed this, it was not until 1990 that the implementing regulation for New York Convention enforcement, Supreme Court Regulation No. 1 of 1990, was promulgated. And thus for the nine years following ratification, the courts had no mechanism to enforce foreign-rendered awards, even though they were aware that    Article III of the New York Convention so required.[3]

Article 634 of the RV provided that registration and application for enforcement of   arbitration awards was to be made in the District Court (Pengadilan Negeri) in the district in which the award is rendered, thus the Supreme Court members could not agree as to which court one would apply for enforcement of a foreign-rendered award, there being no District Court in which to register, nor which would have had jurisdiction to grant enforcement of, an award rendered outside of the jurisdiction of any District Court.   Some judges therefore believed that application should be made directly to the Supreme Court; others that the awards should be “self-executing”; and still others that a single District Court should be designated to take jurisdiction over New York Convention enforcement applications.   But, as there was as yet no guidance from the legislature, those few awards that may have been rendered elsewhere had to lay dormant.

Finally, Supreme Court Regulation No. 1 of 1990 set out the necessary implementing regulations for enforcement of arbitral awards rendered in a country which, together with Indonesia, is party to an international convention regarding implementation of foreign arbitral awards. The District Court of Central Jakarta (Pengadilan Negeri Jakarta Pusat) was designated as the venue to which application for enforcement thereof was to be made.   The Chairman of that court was then allotted 14 days in which to transmit the request file to the Supreme Court, which was then the only court invested with jurisdiction to issue exequatur, the enforcement order, in cases of foreign-rendered awards.

Once the order of exequatur was granted, the same was to be sent back down to the Chairman of the District Court of Central Jakarta for implementation.   If execution was to be effected in a different district (i.e. that of the domicile of the losing party, or the location of its assets), the order was to be delegated to the appropriate District Court for implementation.   Execution was effected on property and possessions of the losing party in accordance with the normal provisions of the RV relating to execution of court judgments.

Regulation 1 of 1990, however, did not set any time limit within which the Supreme Court was required to rule on these applications and, for the most part, they were simply docketed into the Supreme Court’s normal case-load.   Nonetheless, the initial nine applications, those filed between 1991 and mid-1993, were acted upon with reasonable promptness – some in less than six months.   However, no such orders were issued after mid-1994, either of exequatur or rejection thereof, and thus the remaining seven applications filed prior to August, 1999 remained pending at the time of promulgation of Law No. 30 of 1999, the current Arbitration Law.

To make matters worse, although the very first application for enforcement filed after 1990 was granted exequatur without difficulty, actual execution was sabotaged by the respondent through other legal action, a story which was widely published and complained about internationally, undoubtedly being the instrument of the spread of the Myth, which is still believed today.

The case of E.D. & F. Man (Sugar) Ltd. vs. Yani Haryanto involved a long series of arbitral references and court applications.   The subject matter of the dispute was a contract for provision of sugar by claimant Seller to respondent Buyer, FOB a port in Indonesia.   As it happened, at the time certain staples, including sugar, could only be imported when authorized by only the Government Logistics Bureau (“BULOG”), but Buyer had not obtained such authorisation.   Between contracting and intended delivery date, the market price of sugar declined substantially.   The Buyer did not provide the necessary Letters of Credit, and subsequently cancelled the contract.   As the initial purchase contract called for arbitration in London, the Seller commenced arbitration, obtaining an award against the Buyer for breach of contract.   The Buyer then filed a suit in the High Court of London seeking a declaration that the contract was null and void as being contrary to law and public policy, since no permit had been issued by BULOG to import the sugar.   The parties subsequently reached a settlement agreement whereby the Buyer was to pay to the Seller a reduced compensation in installments, also calling for arbitration in London in case of any disputes.   After meeting its obligation with regard to the first installment, the Buyer defaulted on subsequent installments and the Seller again brought arbitration in London, once again prevailing and obtaining an award against the Buyer.   The Buyer did not satisfy the award but instead brought an action in the District Court of Central Jakarta seeking annulment of the original contract on the basis that it was invalid ab initio, being in violation of the law and public policy, and that therefore the arbitration clause was also invalid.

The court apparently followed this logic, despite the fact that it was the Buyer that violated the provisions of law and also that at this stage the parties were in dispute not over the original sale contract but under the subsequent settlement agreement. The settlement agreement was declared null and void by the District Court, and its decision was confirmed at the high court level.   The Seller further appealed to the Supreme Court, and also brought action against the Buyer in the District Court for breach of its obligation to make payments under the settlement agreement.

Although the Supreme Court had issued the order of exequatur to enforce the London arbitral award against the Buyer before hearing the Seller’s appeal to the court verdict, the Seller was nonetheless unable to execute the award because of the appeals still pending. Finally the Supreme Court found for the Buyer in both applications and therefore nullified its exequatur order on the basis that it had now found that the original contract was null and void ab initio and therefore so was the arbitration clause (severability not applicable where a contract is void ab initio as being contrary to law).

Whether this notorious decision was a product of undue influence, or only lack of understanding of the arbitral concept on the part of the court, has never been determined, nor its reasoning followed in any subsequent case. Nonetheless the stigma of this 1991 case, the bad news of which was spread throughout the world, has undoubtedly etched the Myth in the minds of much of the international legal profession.     Today, 25 years later, it is time to forget the past and recognize the current state of play.

Between 1991 and the enactment of the new Arbitration Law in 1999 only one application for enforcement of a foreign-rendered award was rejected by the Supreme Court, and that was on the ground that the parties had not executed an agreement to arbitrate.

III.   The Current Situation

On 12 August, 1999, Indonesia promulgated its new, and in fact its first comprehensive, Arbitration Law, Law No. 30 of 1999, which went into effect immediately upon promulgation and rescinded and superseded Articles 615 – 651 of the RV, those previously covering arbitration.   Although Law No. 30/99 does not also specifically rescind the provisions of Supreme Court Regulation 1 of 1990, a law is superior to a regulation in the legal hierarchy and thus to the extent that the two are inconsistent the provisions of Law No. 30/99 will prevail.   The primary difference between Law No. 30/99 and Supreme Court Regulation No. 1 of 1990 is the designation of the courts which have jurisdiction to issue exequatur, being the court with which the award must first be registered.   Domestic awards, being awards rendered in an arbitration held within the bounds of the nation’s archipelagic jurisdiction, must be registered with the clerk of the District Court “having jurisdiction over the respondent”,[4] which would be that court sitting in the district in which the respondent is domiciled. Such registration must be effected within 30 days of rendering in order for the award to be enforceable. [5]

International awards are defined as “. . . awards handed down by an arbitration institution or individual arbitrator(s) outside the jurisdiction of the Republic of Indonesia, or an award by an arbitration institution or individual arbitrators(s) which under the provisions of Indonesian law are deemed to be International arbitration awards”.   As there has been no legislation to the contrary, an award rendered in an arbitration with venue within Indonesia will be domestic, regardless of the nationality of the parties or other factors.     Unless the Republic of Indonesia itself is a party to the arbitrated dispute, applications for enforcement of international awards are no longer required to be submitted to the Supreme Court at all. Law No. 30/99 vests in the District Court of Central Jakarta (Pengadilan Negeri Jakarta Pusat) the jurisdiction to issue orders of exequatur to enforce international arbitral awards, as well as to execute such domestic awards as are rendered within its normal jurisdiction – central Jakarta.   This shift of jurisdiction has expedited the process significantly. Except for a short hiatus during 2010 – 2011, the District Court of Central Jakarta has acted upon applications for enforcement of foreign awards quite promptly.

IV    Enforcement Procedure

But enforcement of foreign awards is not entirely without some difficulties, although these are primarily administrative and relate to registration, which is required for the award to be enforceable.   Although for an international award there is no time limit for registration, as there is for domestic awards, the registration is required to be effected by the arbitrators or their duly authorised representatives.[6]   While this rarely causes a problem for domestic awards, as the arbitrators, or at least local counsel, are aware that a power of attorney for registration from the Tribunal is required, it has caused some delay in registration of international awards where neither the arbitrators nor the parties’ counsel have familiarized themselves with the requirements of Indonesia’s law.

Often more troublesome is the requirement, for registration of international awards only, that the award be accompanied by a “certification from the diplomatic representative of the Republic of Indonesia in the country in which the International Arbitration Award was rendered stating that such country and the Republic of Indonesia are bound by a bilateral or multilateral treaty on the recognition and implementation of International Arbitration Awards.” [7] (This means New York Convention as Indonesia is not party to any other such treaty.)    While this requirement seems quite straightforward, it has not been effectively communicated by the Foreign Ministry to its consulates, and thus often requires some administrative burden and attendant delay.

Once the award has been registered, the applicant (invariably the claimant) may apply for the order of exequatur. Having issued the exequatur, the court (District Court of Central Jakarta for international awards) will summon the respondent (losing party) and give it the opportunity to comply with the award, usually within 8 days.   If this order is not complied with, the court will issue the attachment order, which will then be sent to the court having jurisdiction over the respondent, which court will attend to execution against the identifiable assets of such party.   Such execution may take some time, as each subject asset must be attached by a bailiff and sold through the state auction house, unless a private sale has been approved, and all of these steps will need to be closely supervised by counsel if it is to be accomplished in a timely manner.

Rejection of exequatur for a foreign award can be appealed to the Supreme Court[8], which must decide upon the appeal within 90 days.[9]   Issuance of exequatur, however, is not subject to appeal.[10]   Nor may a decision of the Supreme Court either issuing or rejecting exequatur or execution, where the Government of Indonesia is a party, be appealed.[11]

The District Court of Central Jakarta keeps a record not only of those awards registered, but also those for which exequatur has been requested, and issued.   However, as most awards are complied with voluntarily and, where not, execution is carried out, for the most part, by one of the almost 300 other District Courts in the archipelago, there is no complete data.   However, to the knowledge of this firm, no application for exequatur of a registered foreign award has been rejected since promulgation of the 1999 Arbitration Law.

So much for the Myth!

In fact, Indonesia is a very arbitration-friendly jurisdiction and, as clearly dictated by Law No. 30 of 1999, the courts may not interfere,[12] except where they are required to assist in the enforcement (as long as the parties did agree to arbitrate and the dispute is of a commercial nature).[13]   Even an interim award on jurisdiction cannot be appealed to the courts, as so often happens in common law jurisdictions thereby greatly delaying the process, almost always unnecessarily.   The process may take a bit longer than it does in some jurisdictions, but it is much quicker and successful than in many others.

Let us hope this note will serve to debunk the Myth, whose misinformation has been spread too widely and for too long.

[1]              By Presidential Decree No 34 of 1981, published in the State Gazette (Berita Negara) of 1981, as No. 40, of 5 August, 1981.   Indonesia made both the commerciality and the reciprocity reservations in its accession.

[2]            State Gazette No. 52 of 1847, juncto No. 63 of 1849 (Arbitration was covered in Articles 615 through 651 of Title I ).

[3]          Article III of the New York Convention provides that every contracting state must recognise and enforce awards rendered in other contracting states without imposing substantially more onerous conditions than are imposed upon recognition or enforcement of domestic awards.

[4]              Article 1 (4), Law No. 30/99

[5]              Article 59 (1), Law No. 30/99.

[6]              Article 67 (1), Law No. 30 of 1999.

[7]           Article 76 (2), Law No. 30/1999.

[8]              Article 68(1), Law No. 30/99.

[9]             Article 68 (3), Law No. 30/99.

[10]            Article 68 (1) & (2), Law No. 30/99.

[11]            Article 68 (4), Law No. 30/99.

[12]            Articles 3 and 11, Law No. 30/99.

[13]            Article 62 (2), Law No. 30/99

Court procedures in the United States are widely perceived to be wasteful and subject to abuse. Pretrial discovery, in particular, is often marked by “fishing expeditions” and tactics intended to harass and pressure defendants into settlements, regardless of the merits. In a 2009 survey, 83% of American Bar Association members responded that litigation costs force the settlement of cases that should not be settled on their merits. It is also not unusual for plaintiffs’ attorneys to seek “discovery on discovery” and initiate disputes to try to turn a judge against the defendant and possibly draw a sanction or easy win for the plaintiff.

Modest changes to the Federal Rules of Civil Procedure that are likely to take effect late this year will help fix some of these problems. State courts in the United States have their own procedural rules, but many of them mirror the federal rules, so the federal rules amendments will ultimately impact state court litigation too.

Presently, civil defendants in the United States bear an asymmetrical proportion of the costs and burdens of discovery. A blue-ribbon advisory committee that develops amendments to the Federal Rules of Civil Procedure received comments and testimony from a wide variety of companies about the costs they bear in civil discovery.

• A healthcare products company estimated that in the last five years it had produced 47 million pages of documents in various litigations. The base cost of processing, hosting, and producing those documents – before any associated fees from lawyers reviewing them – was more than $20 million.
• A drug manufacturer noted that during a recent trial, only 0.04% of the documents that the company produced in discovery were later offered and admitted into evidence at trial.
• An automobile car manufacturer in a single-vehicle product liability action said that it was ordered to produce documents from 1,300 other lawsuits and 1,200 witness transcripts that the plaintiff alleged were related to the subject dispute. The carmaker estimated that the voluminous production request required more than 800 hours from its in-house legal staff and cost $2 million in outside counsel legal fees.

More than 2,300 written comments and testimonies from 120 witnesses were received. Many pointed out that skyrocketing litigation expenses have driven up the cost of doing business and are dragging down American productivity.

From this work, a culmination of a four-year effort by the Committee on Rules of Practice and Procedure of the Judicial Conference and its Civil Rules Advisory Committee, a “package” of amendments to the Federal Rules of Civil Procedure emerged and are now pending before the Supreme Court of the United States. If the amendments are adopted in whole or in part and submitted to Congress before May 1, 2015, they will take effect on December 1, 2015 if legislation is not adopted to reject, modify, or defer them.

Active Judicial Management, “Proportionality,” and “Reasonable Steps” to Preserve ESI

Among the highlights of the proposed amendments are changes meant to get cases moving more quickly and encourage earlier and more active management of discovery by judges. The proposed amendments also place a greater emphasis on “proportionality” and clarify preservation issues regarding electronically stored information (ESI), including pre-litigation failures to preserve.

The amended Rules shorten the time period for service of process and for judges to issue scheduling orders. A new provision added to the Rules allows discovery requests to be delivered to parties before the parties attend a required scheduling conference. There is also an emphasis on greater cooperation and active judicial guidance to discourage overly broad requests by plaintiffs’ counsel looking to drive up pretrial costs.

In addition, a “proportionality” standard has greater prominence in the amended Rules. The scope of discovery must not only be relevant to a party’s claim or defense, but also “proportional to the needs of the case considering the importance of the issues at stake in the action, the amount in controversy, the parties’ relative access to relevant information, the parties’ resources, the importance of discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit.” Another proposed Rule change reminds judges that a protective order against undue burden or expense may include provisions for the “allocation of expenses.”

The amendments also address ESI, which has exploded in volume in recent years. Parties are required “to take reasonable steps to preserve [ESI]” in the anticipation or conduct of litigation—a standard recognizing that it is impractical to expect perfect retention and preservation in every case. Judges are instructed that, if a party is prejudiced by lost information, the court “may order measures no greater than necessary to cure the prejudice.” If a party intentionally deprives another party of information needed in the litigation, the court may give adverse inference instructions to the jury or dismiss the action or enter a default judgment. With these changes, the Rules may help to establish a more uniform standard for preserving electronic information across the federal courts.

Conclusion

The proposed amendments to the Federal Rules of Civil Procedure are an acknowledgement that the current process of pretrial discovery in federal courts needs to be improved. The amendments still need to clear the United States Supreme Court and Congress, but that is likely to happen this year. The language has been carefully crafted and enjoys strong support. The “black letter” in the new Rules will provide a modest help. If judges and litigants embrace the spirit of the changes, the changes could be even more dramatic.

SUNY-Buffalo professor Christine Bartholomew has an article out with the intriguing title “Redefining Predator and Prey in Class Actions.”  Unfortunately, it does not use zoology or mathematical predator-prey equations to explain class litigation—the kind of loopy academic mashups that can be both fun to read and insightful.  Instead, she uses a new “vulnerability theory” to critique the “current impotency” of Rule 23.

So what is “vulnerability theory“?  It appears to be a critique of current policies, arguing that they tend to favor the interests of entrenched institutions over truly disadvantaged groups when determining what is a public good.  In terms class action lawyers on both sides would likely understand better, that would mean placing the interests of the absent class members first.

According to Professor Bartholomew’s vulnerability-based critique, traditional class action scholarship and recent class action caselaw has focused too much on pro-corporation rhetoric, resulting in a superficially neutral, but de facto pro-defense interpretation of the Rule.  Or, as she puts it:

[B]y prioritizing efficiency over public good, rhetoric has redefined the “victim” in class actions. Individual consumers, or putative class members, are no longer seen as the victims of corporate defendants’ malfeasance. Instead, building on dicta from one Seventh Circuit decision, defendants are advancing arguments that class action procedures harm corporate defendants by forcing them into extortionist settlements. Successful class action attorneys have been redefined as the predators with corporations their prey.

It’s probably an overstatement to argue that corporate defendants are perceived as “victims” in a given class action lawsuit.  And Professor Bartholomew is hardly the first academic to believe that class counsel are unfairly maligned, or that legal policy should do more to favor plaintiffs. Indeed, the general progress of her argument will seem very familiar to many consumers of class action scholarship.  She argues that

• Class actions have been rendered impotent by decisions that have advantaged corporations over consumers.  Specifically, courts began accepting two arguments from defendants: (1) certification had the potential to coerce settlements in meritless cases, and (2) class actions were designed to serve judicial efficiency.
• Absent class members are the “vulnerable” group in class action litigation; not corporate defendants, because: (1) they are at a financial disadvantage compared to corporations; (2) they are at an informational disadvantage; and (3) courts favor corporations over consumers.
• As a result, reforming Rule 23 should focus on enhancing deterrence of corporate misconduct, on increasing participation from class members, and on allowing easier cy pres distributions to charities.

Some of these arguments are hardly controversial.  I know of no one who would argue that absent class members are the most vulnerable group in class litigation.  Many of these arguments are well-trod ground.  And a few of the phrasings that Professor Bartholomew employs betray either her bias towards automatically believing the merits of any plaintiff’s claim (“the dominant judicial attitude towards class actions is knee-jerk skepticism”), or a misunderstanding of how class actions work (such as her characterization of cy pres relief: “Class actions have allowed consumers to fund public benefits …”) (Emphasis added.)

Nonetheless, this article is important for two reasons.  First, it provides a relatively new justification for some of the same results-oriented arguments defendants tend to hear from plaintiffs.  “Vulnerability theory” may be novel, but in a political system that seems increasingly polarized between haves and have-nots, or between the 1% and the 99%, knowing the nuances of arguments for skewing the rules in a particular direction is always good.  Second, and more importantly, it reinforces from both a rhetorical and theoretical standpoint one of the central truths defendants must learn when litigating class actions: the best arguments are framed in terms of what is best for absent class members.  Absent class members are the beneficiaries of Rule 23.  Caselaw has consistently held that named plaintiffs, class counsel, and even judges owe absent class members a fiduciary duty.  And, as I have argued before, the interests of absent class members and defendants in a fair procedure for certifying a class often coincide in surprising ways.

“Unlimited data” shouldn’t need scare quotes: what recent FTC action may mean for wireless providers, broadband companies, and class action plaintiffs

On October 28, 2014, the United States Federal Trade Commission (FTC) sued AT&T’s mobile division in the Northern District of California (F.T.C. v. AT&T Mobility LLC, Case No._ [N.D. Cal., Oct. 28, 2014] “AT&T Mobility“). The FTC alleged that AT&T had signed millions of customers to “unlimited” mobile data plans from 2007 through June 2010, but that in July 2011 AT&T began reducing the data speeds, or “data throttling,” for its unlimited customers. This throttling resulted in drastically reduced service for 3.5 million AT&T customers across a total of over 25 million discrete actions. Based on these allegations, the FTC further alleged that AT&T had engaged in “unfair or deceptive acts or practices in or affecting commerce” and sought an injunction and disgorgement.

As the latest in a series of related regulatory actions, AT&T Mobility echoed an earlier FTC complaint against T-Mobile for bill “cramming” (charging customers for services not sought or understood). The AT&T Mobility allegations mirrored mid-2014 concerns raised by the United States Federal Communications Commission (FCC) regarding a similar plan with a different wireless carrier to throttle heavy data users. The FCC also recognized the AT&T Mobility filing with its own statement that (a) the FCC was coordinating with the FTC “on investigations into carriers slowing down unlimited data” and that (b) customers should “contact the FCC if they are being throttled by AT&T or other cellular providers.”

The filing of AT&T Mobility reverberated across the wireless and secondary industries. It put AT&T directly on notice regarding similar practices across its suite of commercial offerings. It also alerted directly competing carriers and other entities either providing unlimited data services or engaged in any kind of data or service throttling that the FTC might scrutinize and pursue similar and related practices. The FTC’s interest in this issue implicates every U.S. wireless carrier, and the potential impact should be measurable by customer head count and contract type.  The FTC and FCC are, of course, not the only interested parties in this arena.  Where the regulators tread, class actions plaintiffs are sure to follow.

Success in AT&T Mobility would not limit FTC and class action plaintiff scrutiny of wireless providers’ practices. Throttling and related advertising practices are also key components of over one hundred Internet Service Providers’ service offerings in the U.S. alone, even if they are most directly evident in those cross-platform carriers offering both mobile and cable or fiber-based internet data service.

AT&T Mobility may have even further implications for FTC enforcement and other legal actions in this arena generally. This unilateral FTC action should alert the telecom industry to the FTC’s additional interest into an area where the FCC has traditionally maintained order. This also may extend the FTC’s reach and enforcement arm into future net neutrality discussions and helps support the FCC’s present practices and rules that were challenged by another carrier in early 2014.

Legal departments across the country will carefully follow the progression of AT&T Mobility and AT&T’s inevitable motion to dismiss. AT&T has already indicated that it will fight the charges—and any additional challenges to its own Internet-based product offerings under the “AT&T U-verse” brand and the net neutrality concerns implicated by AT&T’s July 2014 Netflix deal regarding throttling streaming speeds.